GST Composition Scheme: Who Qualifies and How Tax Is Calculated

Rajesh runs a hardware store in Coimbatore with an annual turnover of around Rs 50 lakh. His accountant mentioned the composition scheme and said it would cut his GST paperwork from monthly filings to quarterly ones. Rajesh's first question was the obvious one: how much tax would he actually end up paying, and would it be more or less than what he pays now.

That is the question this post answers, with the actual numbers.

What is the GST composition scheme? #

The GST Composition Scheme under Section 10 of the CGST Act lets small businesses pay GST as a flat percentage of their turnover instead of calculating tax rate by rate on every sale. In exchange, they give up two things: Input Tax Credit (ITC) on purchases, and the right to charge GST separately to customers.

A composition dealer issues a Bill of Supply, not a tax invoice, and the GST they owe comes out of their own margin rather than being collected on top from the buyer. It is built for businesses with straightforward, mostly intra-state sales who would rather deal with one flat number than track input credits and output tax across dozens of transactions.

How the eligibility and tax rate work #

Eligibility depends on your annual aggregate turnover and, in a few states, on where you operate.

Turnover caps:

• Rs 1.5 crore in most states
• Rs 75 lakh in specified states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand

Cross the cap and you are no longer eligible for the rest of the year; you must move to the regular scheme from the date you cross it.

Tax rates by business type, under Rule 7:

The formula itself is simple:

GST payable = Annual turnover x Composition rate
CGST payable = GST payable / 2
SGST payable = GST payable / 2

No rate classification per product, no separate calculation for each invoice. One percentage, applied once, on the whole year's turnover.

Worked examples with real numbers #

Example 1: Rajesh's hardware store, trader category. Turnover of Rs 50,00,000 in a general (non-specified) state.

GST payable = 50,00,000 x 1% = Rs 50,000
CGST = Rs 25,000
SGST = Rs 25,000

Rajesh pays Rs 50,000 for the year, split evenly, regardless of how many individual sales made up that turnover. You can check this exact scenario on the Rs 50 lakh trader composition example.

Example 2: A restaurant with Rs 30,00,000 turnover, not serving alcohol.

GST payable = 30,00,000 x 5% = Rs 1,50,000
CGST = Rs 75,000
SGST = Rs 75,000

Restaurants pay a higher rate than traders because the composition scheme assumes a different margin structure for food service. See this run on the Rs 30 lakh restaurant composition example.

Example 3: A business in Sikkim (a specified state) with Rs 80,00,000 turnover.

Cap for specified states = Rs 75,00,000
Turnover of Rs 80,00,000 exceeds this cap
Result: ineligible for the composition scheme

This business must register under the regular GST scheme and pay rate-wise GST with full ITC eligibility, even though the same turnover would have qualified in a non-specified state. Check this case on the Rs 80 lakh specified-state ineligibility example.

Example 4: A standalone service provider with Rs 40,00,000 turnover.

GST payable = 40,00,000 x 6% = Rs 2,40,000
CGST = Rs 1,20,000
SGST = Rs 1,20,000

Service providers pay the highest composition rate of the three categories, so the scheme is a smaller win for them on paper, though the compliance savings still apply.

Why the composition scheme helps small businesses #

Fewer filings is the headline benefit: composition dealers file GSTR-4 annually and pay tax quarterly through Form CMP-08, compared to the monthly GSTR-1 and GSTR-3B cycle under the regular scheme. For a shop owner without a dedicated accounts team, that alone is worth something.

The tax amount is also predictable. Once you know your turnover and category, the liability is a single multiplication, not a running total across dozens of GST rate slabs (5%, 12%, 18%, 28%) that regular dealers have to track per product.

There is no need to issue GST-compliant tax invoices with rate breakdowns either. A Bill of Supply is simpler to generate and simpler for customers to understand, particularly in retail and food service where invoices are high-volume and low-value.

Common mistakes and myths #

Mistake 1: Believing you can still charge GST to customers. Composition dealers cannot collect GST separately or issue a tax invoice. The tax comes out of your margin; if you try to add it as a separate line item to your customer, you are doing it wrong and risk penalties.

Mistake 2: Assuming Input Tax Credit is still available in some form. It is not. You give up ITC entirely under the composition scheme. If your business buys a lot of GST-taxed inputs (raw materials, equipment, services), the ITC you are forfeiting might be worth more than what you save in compliance effort, so it is worth running the numbers both ways before opting in.

Mistake 3: Not realizing e-commerce sellers and inter-state suppliers are excluded outright. Regardless of turnover, businesses that supply through an e-commerce operator required to collect TCS, or that make inter-state outward supplies, cannot use this scheme at all. Turnover eligibility is not the only gate.

Mistake 4: Ignoring the mid-year switch requirement. If your turnover crosses the cap partway through the financial year, you must move to the regular scheme from that date and file Form GST CMP-04 within 7 days. Continuing to pay the composition rate for the rest of the year after crossing the cap is not allowed.

Tips for deciding if this scheme fits your business #

• Track your turnover through the year, not just at filing time, so a cap breach does not surprise you mid-quarter.
• Run the math both ways: compare what you would pay in flat composition tax against your regular-scheme liability net of the ITC you would otherwise claim.
• If your customer base is largely other GST-registered businesses that need ITC on their purchases, the composition scheme may make you less attractive to them since you cannot pass on a tax invoice.
• Keep the quarterly CMP-08 due dates on a calendar; late payment still attracts interest even under the simplified scheme.
• Reassess annually. A business that grows past the turnover cap or starts selling through a marketplace needs to plan the switch to the regular scheme in advance, not after the fact.

Related tools #

Once you know whether you qualify and what the flat tax works out to, a few adjacent checks are worth running. If you are close to the eligibility cap, cross-check your numbers with the advance tax calculator to see what you would owe under the regular scheme instead. If you sell through a marketplace and are wondering why the composition scheme excludes you, the TCS on e-commerce calculator explains the 1% deduction that platforms apply to marketplace sellers. And if you are filing late under either scheme, the GSTR-3B late fee calculator shows exactly what a missed deadline costs.

Frequently asked questions #

Can a manufacturer opt for the composition scheme? #

Yes. Manufacturers fall under the same 1% rate and Rs 1.5 crore (or Rs 75 lakh in specified states) turnover cap as traders, unless they manufacture specific goods excluded from the scheme, such as ice cream, pan masala, or tobacco.

Do I need to file GST returns every month under composition? #

No. Composition dealers pay tax quarterly through Form CMP-08 and file a single annual return, GSTR-4, instead of the monthly GSTR-1 and GSTR-3B cycle that regular taxpayers follow.

What happens if I want to opt out of the composition scheme voluntarily? #

You can switch to the regular scheme at the start of any financial year by filing Form GST CMP-04, even if your turnover is still within the composition cap. Once you opt out, you cannot switch back to composition until the following year.

Is the composition rate charged on profit or on turnover? #

On turnover, not profit. The composition rate applies to your total aggregate turnover for the period, regardless of your actual margin on that turnover. This is exactly why the ITC trade-off matters: a low-margin, high-turnover business can end up paying more tax under composition than it would net of ITC under the regular scheme.

Can restaurants serving alcohol use the composition scheme? #

No. The 5% composition rate applies only to restaurants that do not serve alcohol. Restaurants and bars serving alcoholic beverages are excluded from the scheme entirely and must register under the regular GST framework.

Check your own numbers #

Whether the composition scheme saves you money depends entirely on your turnover, business category, and how much ITC you would otherwise claim. Enter your actual annual turnover and business type into the GST composition scheme calculator to see your exact tax liability and confirm you fall within the eligibility cap before you file Form CMP-02 to opt in.